Note: This piece was originally a guest editorial for DJBooth.
This past Wednesday, Meek Mill took to Twitter with a pronouncement about the current state of record deals:
“All records labels should start letting artists have ownership or you will be viewed as a slave master! Make it even for both sides the ones putting money up and the creator!!! Is even too much?”
He added to his statement a little later in a follow-up:
“And I was speaking for the new artist the young 18 year old kids that’s prolly in poverty that get preyed on by big companies with offers for a small fees like a million dollars knowing they will make 50 million back off them and still not offering ownership”
Meek’s ideas are certainly pro-musician. He wants artists to retain ownership of their masters and to receive a larger stake in the success of their records. He wants to end artist victimization. These ideas may sound great, but the reality is that the economics of the major label music business preclude all of them.
It’s easy for Meek to say such things. He already has a deal. Since his situation doesn’t reflect the vast majority of musicians, let’s instead consider the path of a developing artist. He or she may have a hit song, but the record company has the money. The record company can compensate the artist while simultaneously paying for the production, marketing, and promotion of the project. It’s apparent this gives the company vastly more bargaining power during a negotiation, but it’s less apparent the company is actually taking a risk once the contract is signed.
Like any good investor, record companies want to put their money into artists and projects that will show a positive return. The music business is fickle. Consumer taste is difficult to identify, and it takes lots of money to break an artist. For these reasons, the record company—regardless of its support for the artist—must still be willing to accept that risk.
A contract obligates the company to pay an advance, finance the recording, and undertake a marketing campaign, but that’s definitely not a handout. The record company may be very excited at the prospect of signing that artist, and there are often high hopes for shared success, but the record deal is still written to mitigate the company’s downside risk.
Meek’s ideas about ownership, cost-sharing, and scams may sound great, but they’re naïve. Let’s investigate how the music business really works:
Companies create long-term value when they possess a diversified portfolio of products or assets. A record company taking ownership of an artist’s masters is similar. That ownership increases the company’s valuation and allows for an associated revenue stream long after the artist has left the roster.
The record company pays the artist for this ownership, but payment is not only made in the form of an advance check; the company also finances the creation of the masters, pays to market and promote them, and sometimes even pays for tour support or other costs that are only tangentially related. Given their investment in an artist, it is not a stretch to compare record companies to banks. They must take ownership of the masters in order to protect their investments.
If an artist wants to retain ownership of the masters, he or she should expect less money from the company. Those masters are assets, and they make the company stronger and more profitable. Without them, the company faces higher risk and lower return, making it less favorable to offer a large advance or other financial support.
New artists are unlikely to have the capital necessary to get their projects off the ground. It is difficult to grow without a record company’s resources. Superstars can make deals where they own the masters, but that’s because they don’t need the upfront money that a record company can provide.
It’s easy to dismiss these facts and condemn record companies as “slave masters,” but every contract contains an exchange of value. Record companies pay a lot of money and take on a lot of risk in exchange for owning the masters.
Royalties and Recoupment
In a traditional record deal, the company owns the masters and pays the artist a share of the revenue generated. However, the company also has the right to gain back its investment first, before the artist receives his or her share. This process is called “recoupment.”
If it sounds like a loan, it should! But there’s one important difference: if the artist never achieves any sales, the company eats its entire investment. Advances are not returnable, and the company can only get its money back through recoupment. Companies may keep a lot for themselves, but they are doing so to mitigate their incredible risk.
Partnerships, Joint Ventures, and 50/50 Deals
No record contract can ever be a true partnership. The legal definition of “partnership” is that each partner has equal control over the entire business. A partnership is a legal entity, so if one partner signs a contract, it is binding on all, and if one partner gets sued, all partners get sued. No record company is ever going to welcome that kind of arrangement!
Record companies will instead set up a “joint venture” and split profits with the artist. Rather than paying an advance against a royalty, all of the project’s expenses (distribution fee, overhead, operating costs) are collected and deducted from revenue (streaming, record sales, licensing, foreign income). All money remaining is profit, which gets split by the company and the artist.
On the surface, this sounds better than a traditional record deal, and it can be more equitable for the artist. That said, artists must still become thoroughly familiar with the language in their contracts. Record companies will often insist that the profit split cannot be 50/50, or that they can charge reimbursement of the artist’s costs as an expense. They may also charge additional items as expenses even more liberally than they would against an artist’s royalty if it were a traditional deal.
The difference between a traditional record deal and a “joint venture” comes down to bargaining power. If the artist has clout, he or she can aim for the one better suited to their career. In a traditional deal, the money might come at the expense of creative control. Conversely, in a joint venture, the artist may have more control, but he or she may also find that the company’s level of investment and engagement is lower. Before making a pronouncement about which is better, it’s important to first understand the terms as they relate to each specific artist.
Winning the Lottery
One last thing: the streaming marketplace can feel like a lottery. It is common for unsigned artists to release their music in hopes that it will go viral. But just like the real lottery, the odds of winning are minuscule. Despite this, musicians still try their luck, hoping to get noticed, and (unfortunately) exposing themselves to scams in the process. It’s sad that those conditions exist, but they’re the result of marketplace illusion, not record company corruption.
It takes creativity and business savvy to be successful in the music business. It’s crucial to learn about the business, create a plan, read the fine print, and understand how to avoid being scammed. This will serve artists well, whatever deal they pursue.